This is an edited version
of an informal presentation which Terry Adams made at the Am-Cham
Luncheon (Azerbaijan-American Chamber of Commerce) at the Hyatt
Regency on June 26, 1997.

When you look at the AIOC consortium,
there's one word that clearly describes it- "complexity."
But it is this same complexity which brings strength to the project
and which has been absolutely crucial both for the success of
our Early Oil project and for the incredibly rapid pace of delivery
that we've made under very difficult circumstances.

Foreign Oil Companies (FOC)
deliver this strength in a variety of ways. First of all, and
perhaps the most important means, is through technology transfer.
There has never been any doubt that AIOC could handle such an
offshore project.

Secondly, our financial strength.
Two and a half years ago Azerbaijan was an untested entity, and
AIOC was perceived as a very high risk investment. However, each
partner was able to fund its share of the initial investment
within their companies. AIOC did not need to go to the market
for third-party funding to obtain the $1 billion needed to kick-start
the project.

Thirdly, the AIOC partnership,
representing seven nations, has brought incredible international
geopolitical support to Azerbaijan.

AIOC was the first Production
Sharing Agreement (PSA) to be signed in Azerbaijan. The event
took place back in September 1994. Still to this day, it is the
only development production sharing contract-meaning the only
field with proven oil reserves. The oil reserves are known to
exist, and the commercial contract reflects this essential fact.

In the last twelve months or
so, four more contracts have been signed [for the blocks of (1)
Karabakh, (2) Shah Daniz, (3) Ashrafi and Dan Ulduzu and (4)
Lankaran-Talysh] but they are all Exploration Production Sharing
(EPS) contracts. People tend to refer to them as oil fields but,
in fact, none of them has yet to be tested. Inevitably, some
of them will turn out to be successful; others will be failures.
There is no guarantee that each of these contracts will deliver
oil. Nevertheless, each contract demonstrates the oil strategy
that the Azerbaijan government has so successfully pursued. Let
me point out four major points related to their strategy.

Oil Strategy Favors
Azerbaijan
First of all, each of these contracts has been negotiated very
successfully and has resulted in tough commercial terms which
favor Azerbaijan. Consequently, there's not likely to be any
temptation for either party to want to re-negotiate.

About three weeks ago, there
was a very interesting article in the "Oil and Gas Journal"
ranking 124 Production Sharing Agreements that currently exist
worldwide. No. 1 represented the contract most favorable to the
investor; No. 124 meant that the contract was most advantageous
to the government. The AIOC contract ranked No. 104. So when
people complain that Azerbaijan may have "given away the
family jewels," the truth is that SOCAR has negotiated a
very tough commercial contract that favors Azerbaijan.

Contracts Enforced
by Law
The second strategic element that the Azerbaijan government has
achieved has been to ensure that each of their Production Sharing
Agreements became a force of law in its own right. All have been,
or will be, ratified through Parliamentary process.

Again, for each contract, the
contractual ground rules and the commercial terms are very clearly
defined from the beginning and, consequently, will be very difficult
to change in the future. These gives the foreign investor confidence
in the longevity of the contract and its reinforcement by law.

Geopolitical Strength
Thirdly, these contracts have created remarkable geopolitical
strength for Azerbaijan's long-term independence. There are now
twelve international capitals firmly represented in the investment
in these five contracts-Washington, Moscow, London, Oslo, Paris,
Berlin, Rome, Brussels, Ankara, Tehran, Tokyo and Riyadh. In
other words, the countries these capitals represent are aligned
with Azerbaijan, through their own commercial national interests.

Of the five contracts that have
been signed so far; clearly, the U.S. has taken the lead. However,
Russia comes in very close behind, then U.K., followed by every
major European capital along with Turkey, Iran, Japan and Saudi
Arabia. Azerbaijan's global importance has clearly emerged as
a direct consequence of its oil strategy.

Economic Renewal
Fourthly, the contracts now carry between $20-$25 billion dollars
of work investment commitment which will form the basis for the
overall economic renewal of Azerbaijan. The oil strategy of Azerbaijan
is clearly a strategic and political statement, representing
the vision of President Aliyev and working to the unique advantage
of the country. Such a successful economic geo-political strategy
has not been achieved anywhere else in the former Soviet Union,
including the Russian Federation!

International Strategy
The question must be asked: "How did such a strategy work
in the geopolitical complex region of the Caucasus?" It's
because of the presence of two world-class leaders in the Caucasus
at a unique time in history when international engagement is
required. President Heydar Aliyev in Baku and President Eduard
Schevardnadze in Tbilisi have created an international bridgehead
for Western investment in the Caspian as a direct result of their
international reputations on the world stage.

AIOC Early Oil Project
Chirag-1 Offshore Pipelay Progress

This international strategy
coincided during a period of significant internal political distractions
in Russia, Turkey and Iran, giving Azerbaijan and Georgia a chance
to get on with business. Since the AIOC project began 30 months
ago, international business is facing a very different situation
than when we started. The business environment in which we operate
is substantially more secure than it was in the past. Azerbaijan
is enjoying a sustainable oil boom in which "flag has followed
trade."

The Future
What does the future look like? Generally speaking, Azerbaijan
has a very high probability of producing up to 1.5 million barrels
of oil a day within the coming decade. And, potentially, they
could produce perhaps 2 million barrels a day just from the existing
contracts alone.

Two million barrels a day is
equivalent to Kuwait's current production in OPEC. However, this
does not mean Azerbaijan is another Kuwait. There has been much
speculation in the media that Azerbaijan and the Caspian will
be like another Middle East. However, a more accurate comparison
would be the North Sea. Coincidently, Azerbaijan's proven reserves
of 17.5 billion barrels is exactly equivalent to that of the
North Sea's. But from the known database, geologically speaking,
at least, the equivalent of two more North Seas may be found
in the South Caspian.

Azerbaijan's oil production
potential of 1.5-2 million barrels per day will arrive during
the first decade of the next century when there will be global
demand for this supply, and when other global oil provinces will
have begun to decline. As a result, the Caspian will become a
crucial player in the international oil industry for many decades
to come.

In addition, the production
profile very clearly shows that there is a need for a main export
pipeline sometime around 2002 or 2003 when AIOC excess production
will exceed existing export capacity and other contracts will
also be onstream for export to the West.

The need to select a main export
pipeline route is already a matter of urgency; as it will take
five years lead time to negotiate, finance, and build such a
line. However, the decision for the direction of the route remains
open to negotiation.

Why have foreign investors dared
to take the risks in this region? Simply, the Azeri, Chirag,
deep-water Gunashli oil field is a very large, but essentially,
very simple structure. AIOC predicts a recoverable reserve of
at least 4 billion barrels, making it a super-giant field by
any global measure. Access to such large reserves in a single
structure presents a very rare opportunity. If you were to superimpose
this field onto a London map, it would extend from one end of
the M25 motorway to the other end.

Northern Pipeline-Russia
The Early Oil project essentially has been quite straightforward
despite the complexity in ensuring its delivery to Western markets.
The crucial element was resolved last year (1996) with the successful
negotiation of inter-governmental and transportation agreements
for the use of existing pipeline infrastructures to get Early
Oil to the Black Sea. Agreements were first signed with the Russian
Federation for access via a northern pipeline to the port of
Novorossyisk. AIOC will operate this line up to the border of
Russia and then transfer custody to Transneft, a Russian oil
company, which is obliged to deliver the equivalent volume of
oil, but not necessarily the same oil, to our tankers.

AIOC have been given contractual
priority to export up to 5 million tons (or 100,000 barrels a
day) of Azerbaijan oil through the Russian Federation to this
Black Sea Port. Azerbaijan's oil is already waiting in the pipeline
at the border to transit through Russia. Unresolved issues between
the Chechens and Russia have currently stopped its flow.

Western Pipeline-Georgia
In terms of the Western pipeline, we are already constructing
a marine terminal at Supsa on the Black Sea in Georgia. Contracts
have also been awarded for the refurbishment of the existing
pipelines that connect the two countries. We are issuing tenders
for building new pressure reducing stations and various pump
stations along the pipeline system. Everything should be completed
between Azerbaijan's terminal at Sangachal and the port of Supsa
by the fourth quarter of 1998.

These two export lines should
give AIOC considerable flexibility. Considering that AIOC did
not get shareholder sanctions for the Early Oil offshore project
until March 1996 which was the same time that export pipeline
agreements were also signed, everything has moved ahead very
rapidly in a year and a half between March 1996 and September
1997. In fact, this is probably the fastest delivery of any offshore
project I've seen in any part of the world. It has clearly demonstrated
that through mutual cooperation and commitment, major things
can happen in Azerbaijan. It proves regional logistics work!
We have relied very heavily on the cooperation of SOCAR and the
Azerbaijani government along with the exceptional support of
our contractors. We should all be proud of what has been achieved
collectively!

AIOC should be very close to
delivering offshore Early Oil by the end of August or early September.
Remember, we gave the President a "time window" for
delivery. We told him there was a 15 percent chance of delivering
by August 28; with a strong incentive bonus to be paid if we
achieved this. And there was about a 50 percent chance that we
would finish by the middle of November, with no bonus to be paid.
Despite serious delays caused by harsh weather, and mechanical
problems brought about by the untested infrastructure, the project
has gone extremely well.

Suppliers
So, how has AIOC spent its money? Where did it all go? Our sources
of supply have been essentially international. In general, the
most successful companies are those which arrived early on the
scene in Baku. The U.S. has done well, as has the U.K. But Azerbaijani
companies, on a truly competitive basis, have learned quickly
and been very successful. The rest of the suppliers are international.

At the beginning, we wondered
how we were going to get all our supplies to Azerbaijan. Originally,
we planned to transport them via the rivers and canals of Russia
and the Russian railway system. In the end, most of our shipments
have been delivered to Georgian ports on the Black Sea and transported
by rail or road to Azerbaijan.

Let me comment on the quality
of local workmanship in Baku. Quality and delivery has been exceptional.
As for logistics, two and a half years ago, we thought this would
be another business risk. AIOC has been truly amazed at the productivity
and standards that have been achieved for Early Oil. In fact,
productivity and quality performance in Baku have matched that
of the Gulf of Mexico and the North Sea-a fact that bodes extremely
well for the future.

Lessons Learned
So what are the positive business messages that we've learned?
Clearly with commitment and mutual respect and understanding,
Western companies can make it happen; and it's possible to make
things happen very quickly!

The lessons we've learned so
far include:

1. Recognize complexity and
plan for it.

2. Maintain clarity of vision.
Know what you want to do. Know where you want to go. And know
when you want to be there. Unless you have a very clear vision,
things probably won't work very well.

3. Milestones. Set targets and
dates by which you can measure performance. Identify problems
they arise and solve them quickly.

4. Define your standards and
maintain them. AIOC committed to international standards and
we have kept to them. This is not just professional pride; but
a prime requirement from our shareholders.

5. Maintain business ethics.
AIOC has been extremely firm in handling our business. We are
totally cognizant of the rules and requirements of the U.S. FCPA
and are committed to full compliance of them. International tendering
has been conducted according to Western standards. We have had
no evidence of corruption or coercion on this project. It may
be our size and the national priority given to our project but
AIOC has maintained high standards and will continue to do so.
We are fully open to audit and are proud of our track record.
"Quality, Delivery and Price"-that's our business motto,
and it's not likely to change.

6. Be mindful and sensitive
of local interests. We are working in Azerbaijan-a former Soviet
economy which has essentially collapsed. Therefore, we must not
compromise standards, nor quality or price. If we continue to
recognize that local interests are important for long-term success,
then the future is assured. I always say "If Azerbaijan
wins, we all win. But if Azerbaijan loses, we all lose."

The Future Prize
The real prize lies in the future-Full Field Development (FFD).
We intend to build three production super complexes. The first
will be located in the middle of the Azeri field; the second,
on deep-water Gunashli, and the last, on the eastern end of Azeri.
Each complex will have a production potential for up to 300,000
barrels a day. We anticipate a sustainable peak production of
800,000 barrels per day by about 2006-2007. We have already committed
$30 million dollars to the front-end engineering of the first
super-complex, which is being carried out in London. We call
this, the "Next Step," and it will require $3 billion
investment.

Early Oil, by comparison, costs
just in excess of $1 billion. Full Field Development will cost
$10 billion.

The Oil Strategy of Azerbaijan
is working well. All this must be seen in a truly regional political
context. Clearly, there are risks; but I'm sure that from what
we've achieved so far, things will continue in a very positive
direction.

Remember that oil has a very
long tradition in Baku. Azerbaijan created the first international
oil industry at the turn of the last century. It was Baku that
supplied the majority of oil to support the Eastern Front during
World War II. And it was Azerbaijan which developed the first
offshore fields in the world.

Future Pipeline Route
There has been so much speculation in the media as to which route
will be chosen for the main export of oil from this region. This
pipeline must be completed by 2003 at the latest. There's such
an intense interest in the issue. There are so many agendas and
solutions that have been presented.

Recently, the American Embassy
complained to me that we were being inconsistent in our approach
to the problem. They said that two weeks ago we announced that
the pipeline would be a "political" decision, but then
that last week we claimed it would be "economic." Today,
I'll tell you that the solution must be "diplomatic."
When I'm asked where the pipeline will go, I continually say:
"It may go through Russia, it may go to Supsa (Georgia),
or it may go to Jeyhan (Turkey). And that's official!"

Terry Adams has been the
President of AIOC since its founding in 1995.